Rapid growth of GCU has school on fast track

When investors took over Grand Canyon University in 2004, it was on the verge of bankruptcy. The school was $40 million in debt and losing $16 million a year, and its owners were just six weeks away from closing its doors.

The Phoenix school had 950 paying students, generating revenue of $20 million a year. The dorms — former apartment units nearby — had no air conditioning or Internet access.

“Everybody thought I was on crack when I said it would be a billion-dollar company,” said Michael Clifford, one of the investors, who also is chairman of Rancho Santa Fe, Calif.-based Significant Federation LLC.

Originally a private Baptist college, GCU became the first regionally accredited school in American history to convert from not-for-profit to for-profit status, he said.

Today, GCU operates under Grand Canyon Education Inc. as a publicly traded entity. It reported $236 million in net revenue for the six months ended June 30 and is one of the only for-profit universities in the nation with enrollment growth.

This fall, its campus at 3300 W. Camelback Road in Phoenix welcomed 6,500 students. Plans call for accommodating 15,000 students by 2015.

Of this year’s students, 42 percent are studying the health sciences, including 326 new pre-med students, 514 pre-physician assistant students, 42 in pre-pharmacy and 88 in pre-physical therapy.

GCU’s online component has 40,000 students, with 40 percent of those studying at the graduate level.

Over the past three years, GCU has invested $80 million in technology and more than $200 million in construction projects at its campus near 35th Avenue and Camelback Road, he said.

While other for-profit universities are facing shrinking enrollment, GCU’s numbers continue to climb, said Trace Urdan, managing director and senior analyst of equity research for New York-based Wells Fargo Securities LLC.

“They clearly have a differentiated mod-el,” he said. “When Grand Canyon’s margins get into the mid-20 percent range, their intention — as they stated — is to stop expanding the margins and to take the additional leverage and efficiencies and put that back toward lower-cost tuition.”

GCU management won’t follow the same path Apollo Group Inc.’s University of Phoenix did when its margins were in the 30 percent range, he said.

“That’s a level that makes politicians crazy,” he said. “It’s just too high. Instead, they will use that additional leverage and lower their prices and basically grow through volume alone. That is potentially really exciting.”

Urdan said GCU is on the short list of companies he views as investments.

“They’re on such solid footing,” he said. “They don’t have anything they’re trying to overcome the way these other companies do. It’s really an investment. It’s a natural growth stock you can buy and put away for five years. It’s unique within the sector.”

Bob Andringa, president emeritus of the Council for Christian Colleges and Universities in Washington, said he visited GCU back when it was struggling as a small nonprofit liberal-arts school.

“What I appreciate about them is that they’re entrepreneurial,” Andringa said. “They’re willing to invest in improving quality and attracting new students. The new building they’ve done is really unheard of in this day and age. Very few private colleges have anything near the campus expansion that Grand Canyon has had.”

Clifford still owns stock in the company, but would not say how much.

Along with fellow investors Brent and Chris Richardson, Clifford raised capital during the first few years, bringing in many angel investors along with Endeavour Capital, an investment firm with offices in Portland, Seattle, Los Angeles and Denver.

“We are proud we were able to save a great institution (and) keep a private university here in Phoenix, and we grew it beyond our wildest imagination,” said Brent Richardson, GCU’s executive chairman.

In July 2008, the GCU investors lured Mueller away from Apollo Group, hiring him as CEO and taking the university public by November of that year.